atticus if annualizing naked put returns is inaccurate, then how do you evaluate them? do you just eliminate the last step (annualizing) and base your decision off that?
Then you must always be buying Otm calls. Hey selling skew must be free money!!! I found an arbitrage thanks to seventh cereal.
Do you earn 4% in a week on your portfolio and assume that you'll be spending that 8x return in a year? It's no different whether is be positions or portfolios. I calculate how much I can lose. I don't think I've ever looked at a position's annualized return.
I agree that annualizing % return on very S-T trades is meaningless. Hence, I don't annualize trades less than 3 weeks either, as they will almost always be very high anyway. I focus more on "dollars earned" on those S-T trades. I assume you have never annualized your % returns for either one or two reasons. That being, either your trades are less than 3 weeks.... Or because you know your % returns are "well above" any minimum % return that would be acceptable. For example, if my minimum % return on a trade is 13%, and I know the return on a trade I'm considering is obviously over 30%, there would be no reason to bother doing the calculation. The ONLY reason I calculate my % returns, is because I want to be sure I've established "at least the MINIMUM acceptable % return", for the risk I am incurring. If I know I'm well above that minimum, I wouldn't bother to calculate it either.
Seems that your focus in this discussion is entirely on returns. That can be a deadly error. If you are regularly selling puts, I strongly suggest that you shift your focus to potential losses and you'll live longer.
It's not arbitrary. It's based on common sense. If my goal is a minimum % return of 13% or higher, I know just about any trade I'm considering for a period less than 3 weeks, is going to yield a % return greater than 13%. A strike of $25, a credit of a puny $0.09 and 10 day contract = 13.14% You have to admit a credit of just $0.09 for a $25 strike is rather puny. And yet it earns 13%. Hence the reason I look at "dollars earned" on such short term trades. Not % return.
All trades are about potential gains and potential losses. Thus potential by itself means nothing. Hence the reason i focus my attention on "probability" of a profit/loss, vs merely potential. By viewing each trade from the perspective of "probability" of a profit, I am indirectly focussing on potential for loss. Potential means nothing, without viewing it in the "context of probability". Traders who focus merely on potential gain/loss, are eventually doomed to failure. Successful trading over time, is about analyzing probability. Not merely potential. Please note.... I did not say calculating probability. I said "analyzing".